GLOBAL FACTORS GIVE USD AND GBP FRESH IMPETUS

The US Federal Reserve’s decision to pause interest rate hikes in December after slashing rates by 75 basis points this year, signals its belief that the US economy does not need additional monetary stimulus for the time being.

Chairman Jerome Powell reiterated that the current stance of monetary policy is likely to remain appropriate if incoming data are broadly consistent with the Fed’s outlook.

The statement dropped an earlier reference to uncertainties about the economic out- look – a change that could be interpreted as slightly hawkish – but still noted that “global developments and muted inflation pressures” will influence the future path of monetary policy.

“Job gains have been solid, on average, in recent months, and the unemployment rate has remained low,” the Fed said. “Although household spending has been rising at a strong pace, business fixed investment and exports remain weak. On a 12 month basis, overall inflation and inflation for items other than food and energy are running below 2%.”

The US Dollar index is up just over 1% against a basket of currencies year to date, even though it has erased some of its gains from earlier this year.

Meanwhile, the US stock markets also performed well with the S&P 500 up 25.8%, Dow Jones Industrial Average (DJIA) climbing 20.7%, and Nasdaq Composite surging 31.2% in the first 11 months of 2019.

The global economy had been worried about the US-China standoff and Brexit, and both situations show signs of easing in early December.

The Conservative party won a strong majority in the latest UK elections, pushing the GBP/USD to highs above 1.3500. The British pound is now up 4.45% against the US dollar.

Having run on the promise to "get Brexit Done" and to not seek an extension to the transition period, prime minister Boris Johnson has the daunting task to follow through, which could limit sterling upside. Johnson's large majority will allow the UK and EU to move onto the transition period, where the UK and EU will negotiate trade, immigration, legal and security issues, among others, by the end of 2020.

The UK’s FTSE 100 had risen 10.2% in the first 11 months of the year, lagging its European counterparts such as DJ Stoxx 600, which is up 21% during the same period. More clarity on Brexit could lead to a relief rally in the FTSE.

The European Central Bank, under new president Christine Lagarde, also maintained interest rates in December.

“The risks surrounding the euro area growth outlook, related to geopolitical factors, rising protectionism and vulnerabilities in emerging markets, remain tilted to the downside, but have become somewhat less pronounced,” Lagarde said in her speech on 12 December.

The euro is down 3% against the US dollar this year, and this underperformance will likely remain as the US economy is expected to outperform the EU next year.

In December, the Bank of Japan also decided to leave monetary policy unchanged, maintaining the current level of short- and long-term rates and the specifics of its asset purchase programmes. It also announced details of its forthcoming exchange-traded funds lending facility.

The decision to hold came as the BoJ sees global risks to growth abating and bond yields have trended closer to 0% in recent weeks. With the government’s recently announced stimulus package likely to bolster growth in 2020, there is less pressure on the BoJ to act. Still, the Bank is keeping a close eye on global risks.

“It’s true we’ve seen some positive developments regarding overseas risks,” Bank of Japan Governor Haruhiko Kuroda said, welcoming receding fears of a disorderly Brexit and recent progress made by Washington and Beijing to de-escalate their bruising trade war.

“Things are moving forward but uncertainty remains high. We still need to guard against downside risks to Japan’s economy,” he told a news conference.

The yen has remained largely stable against the U.S. dollar this year, down 0.19% year-to-date to 109.38 at the end of the third week of December.

Finally, the U.S.-China trade truce should have a positive impact on the Chinese yuan, coupled with stronger economic data of late emerging from the country’s economy.

The Chinese yuan has risen just under 2% year-to-date against the greenback. Loosening of more tariffs in 2020 could see more appreciation in the Chinese currency.